THE OAKMARK SMALL CAP FUND
Report
from James P. Benson and
Edward A. Studzinski, Portfolio Managers
THE OAKMARK SMALL CAP FUNDReport
from James P. Benson and |
|
| THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (6/30/04) AS COMPARED TO THE RUSSELL 2000 INDEX10 | ||||
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| Annual Average Total Returns | ||||
| (as of 06/30/04) | ||||
| Total Return Last 3 Months* |
1-year | 5-year | Since Inception (11/1/95) |
|
| Oakmark Small Cap Fund (Class I) | -1.27% | 24.01% | 6.47% | 11.10% |
| Russell 2000 | 0.47% | 33.37% | 6.62% | 9.74% |
| S&P Small Cap 60011 | 3.60% | 35.26% | 10.68% | 12.49% |
| Lipper Small Cap Value Index12 | 1.64% | 37.30% | 13.06% | 13.28% |
| The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. | ||||
| The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. Past performance does not guarantee future results. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. | ||||
| * Not annualized | ||||
The second calendar quarter of 2004 was a period of generally flattish stock prices, and your Fund dropped slightly lower during the quarter. In economic news, general activity continued to expand at a fairly brisk pace, and job creation finally began in earnest. At the end of the quarter the Federal Reserve moved interest rates up modestly, marking the first increase by the Federal Reserve in four years. We believe that these trends—an accommodative central bank, continuing productivity growth, and increasing corporate cash flows—create a favorable environment for stocks. In summary, during the just concluded quarter the S&P 500 Index4 rose by 2%, and the Russell 2000 Index was flat. Your Fund experienced a decline of 1% during the past three months, which places its year-to-date performance above the 3% increase in the S&P 500 Index and slightly below the 7% gain of the Russell 2000 Index.
Growing corporate cash flow, strengthening balance sheets, and higher stock prices are typically the ingredients needed for an acceleration in corporate takeover activity. In 2000-2001, we experienced a reasonable level of takeover activity among the stocks held in your Fund, but the frequency of takeover offers fell in 2002-2003 as the economy slumped. This past quarter, two of our holdings—NeighborCare and Grey Global—were involved in potential takeover transactions. NeighborCare received an unsolicited offer from Omnicare, while news reports indicated Grey Global had hired investment bankers to explore a possible sale. Both stocks reacted favorably to these developments, and we believe this activity highlights the inherent value of the companies that your Fund owns. While we rarely buy stocks solely for their takeover value, our method of estimating the private market value of a company and buying its stock at a discount means that our holdings are often attractive to larger companies.
Your Fund's New Investments
This past quarter's activity was fairly typical with the addition of three positions and the sale of two positions. The companies we sold were Callaway Golf and Landry's Restaurants. Callaway was a disappointing investment as intensifying competition in golf clubs led to larger than expected pricing discounts. Since we could not foresee any indication that this pricing environment would improve, we elected to exit this position. Our investment in Landry's was a positive experience, and when the stock appreciated towards our estimate of fair value, we sold those shares.
During the past quarter we added Connetics Corp., Itron Inc., and United Stationers Inc. to the portfolio. Connetics is a specialty pharmaceutical firm focusing exclusively on the treatment of dermatological conditions. This company has a proprietary foam delivery system that we believe has significant advantages in its efficacy and cosmetic appearance, which should lead to improved patient compliance and satisfaction. The currently markets two products, OLUX Foam and Luxiq Foam, and it has two products pending approval by the Food and Drug Administration. Additionally, the firm has another product in Phase III clinical testing. We believe Connetics has a bright future.
| Highlights |
|
Itron is a leading maker of automated meter reading systems for the utility industry. The company's products help utilities manage load planning, transmission and distribution, customer care, and workforce automation. Itron's automated meter reading products, software, and services help utilities lower personnel costs and improve accuracy and efficiency. Itron is in the process of purchasing Schlumberger's solid-state electrical meter business, which we believe should provide Itron with even greater product breadth and stronger market shares. We feel Itron's cost effective products and services will resonate with their customers, and thus we like the long-term outlook for the business.
United Stationers is the largest office products distributor in the country and is more than twice as large as the number two office products distributor. However, during the 1990s United Stationers focused too much on revenue growth at the expense of operating efficiencies. After a period of lackluster financial results, the company hired a new management team in 2002 whose mission was to wring inefficiencies out of the company's operations. Given the firm's large sales base, small percentage improvements in operating margins should result in increased profitability. Due to encouraging early results, we believe the company can extract additional efficiencies over the next few years. Additionally, a growing economy should work in United Stationers' favor.
We believe that all of these additions are trading at significant discounts to their private market values, possess growing business values and have shareholder-oriented managements, we believe the long-term future of small cap equities remains bright.
Conclusion
We would like to thank our shareholders for your ongoing interest in and your support of The Oakmark Small Cap Fund. Additionally, we look forward to communicating with you again next quarter.
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| James P. Benson, CFA Portfolio Manager jbenson@oakmark.com |
Edward A. Studzinski, CFA Portfolio Manager estudzinski@oakmark.com |
| THE OAKMARK SMALL CAP FUND |
Schedule of Investments—June 30, 2004 (Unaudited)
| Name | Shares Held | Market Value |
| Common Stocks—92.6% | ||
| Food & Beverage—8.5% | ||
| Ralcorp Holdings, Inc. (a) | 400,000 | $14,080,000 |
| Del Monte Foods Company (a) | 720,000 | 7,315,200 |
| American Italian Pasta Company, Class A | 200,000 | 6,096,000 |
| CoolBrands International, Inc. (a)(b) | 335,000 | 5,482,979 |
| 32,974,179 | ||
| Household Products—4.1% | ||
| Tupperware Corporation | 825,000 | $16,029,750 |
| Security Systems—4.5% | ||
| Checkpoint Systems, Inc. (a) | 968,300 | $17,361,619 |
| Apparel—2.3% | ||
| Oakley, Inc. | 671,200 | $8,685,328 |
| R.G. Barry Corporation (a) | 120,500 | 196,415 |
| 8,881,743 | ||
| Automobile Rentals—2.6% | ||
| Dollar Thrifty Automotive Group, Inc. (a) | 375,000 | $10,290,000 |
| Building Materials & Construction—2.6% | ||
| Integrated Electrical Services, Inc. (a) | 956,600 | $7,700,630 |
| Insituform Technologies, Inc., Class A (a) | 150,000 | 2,440,500 |
| 10,141,130 | ||
| Consulting Services—3.2% | ||
| Watson Wyatt & Company Holdings | 237,000 | $6,316,050 |
| FTI Consulting, Inc. (a) | 360,000 | 5,940,000 |
| 12,256,050 | ||
| Home Builders—2.8% | ||
| Levitt Corporation, Class A (a) | 427,300 | $11,007,248 |
| Human Resources—2.4% | ||
| Hudson Highland Group, Inc. (a) | 300,000 | $9,198,000 |
| Information Services—3.2% | ||
| eFunds Corporation (a) | 700,000 | $12,250,000 |
| Marketing Services—3.0% | ||
| Grey Global Group, Inc. | 11,750 | $11,573,750 |
| Office Supplies—1.5% | ||
| United Stationers Inc. (a) | 150,000 | $5,958,000 |
| Publishing—1.1% | ||
| PRIMEDIA Inc. (a) | 1,500,000 | $4,170,000 |
| Restaurants—2.0% | ||
| Triarc Companies, Inc., Class B | 500,000 | $5,085,000 |
| Triarc Companies, Inc. | 250,000 | 2,582,500 |
| 7,667,500 | ||
| Retail—2.2% | ||
| ShopKo Stores, Inc. (a) | 600,000 | $8,484,000 |
| Bank & Thrifts—3.6% | ||
| People's Bank of Bridgeport, Connecticut | 375,000 | $11,681,250 |
| BankAtlantic Bancorp, Inc., Class A | 125,000 | 2,306,250 |
| 13,987,500 | ||
| Insurance—1.1% | ||
| U.S.I. Holdings Corporation (a) | 283,000 | $4,471,400 |
| Other Financial—3.6% | ||
| NCO Group, Inc. (a) | 530,000 | $14,145,700 |
| Real Estate—1.8% | ||
| Trammell Crow Company (a) | 495,000 | $6,979,500 |
| Health Care Services—4.3% | ||
| NeighborCare, Inc. (a) | 537,300 | $16,833,609 |
| Medical Products—6.0% | ||
| CONMED Corporation (a) | 400,000 | $10,960,000 |
| Hanger Orthopedic Group, Inc. (a) | 576,000 | 6,750,720 |
| Advanced Medical Optics, Inc. (a) | 134,200 | 5,712,894 |
| 23,423,614 | ||
| Pharmaceuticals—1.6% | ||
| Connetics Corporation (a) | 300,000 | $6,060,000 |
| Computer Services—3.7% | ||
| CIBER, Inc. (a) | 1,625,000 | $13,357,500 |
| Interland, Inc. (a) | 340,000 | 955,400 |
| 14,312,900 | ||
| Computer Software—9.4% | ||
| Mentor Graphics Corporation (a) | 950,000 | $14,696,500 |
| MSC.Software Corp. (a) | 1,350,000 | 12,082,500 |
| Sybase, Inc. (a) | 550,000 | 9,900,000 |
| 36,679,000 | ||
| Data Storage—2.4% | ||
| Imation Corp. | 215,000 | $9,161,150 |
| Aerospace & Defense—1.8% | ||
| Herley Industries, Inc. (a) | 211,500 | $4,132,710 |
| Teledyne Technologies Incorporated (a) | 140,000 | 2,802,800 |
| 6,935,510 | ||
| Instruments—0.6% | ||
| Itron, Inc. (a) | 105,000 | $2,408,700 |
| Forestry Products—2.0% | ||
| Schweitzer-Mauduit International, Inc. | 250,700 | $7,678,941 |
| Oil & Natural Gas—4.7% | ||
| St. Mary Land & Exploration Company | 275,000 | $9,803,750 |
| Cabot Oil & Gas Corporation | 200,000 | 8,460,000 |
| 18,263,750 | ||
| Total Common Stocks (Cost: $275,692,713) | 359,584,243 | |
| Par Value | ||
| Short Term Investments—7.0% | ||
| U.S. Government Bills—2.6% | ||
| United States Treasury Bills, 0.98% - 1.06% due 7/8/2004 - 7/22/2004 | $10,000,000 | $9,995,956 |
| Total U.S. Government Bills (Cost: $9,995,956) | 9,995,956 | |
| Repurchase Agreements—4.4% | ||
| IBT Repurchase Agreement, 1.19% dated 6/30/2004 due 7/1/2004, repurchase price $15,000,496 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $15,750,000 | $15,000,000 | $15,000,000 |
| IBT Repurchase Agreement, 0.70% dated 6/30/2004 due 7/1/2004, repurchase price $1,952,162 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $2,049,730 | 1,952,124 | 1,952,124 |
| Total Repurchase Agreements (Cost: $16,952,124) | 16,952,124 | |
| Total Short Term Investments (Cost: $26,948,080) | 26,948,080 | |
| Total Investments (Cost $302,640,793)—99.6% | $386,532,323 | |
| Other Assets In Excess Of Other Liabilities—0.4% | 1,712,802 | |
| Total Net Assets—100% | $388,245,125 | |
| (a) | Non-income producing security. |
| (b) | Represents a foreign domiciled corporation. |